MONEY MARKETS-U.S. rates futures bask in post-Fed glow

* U.S. rates futures rise to contract highs

* Benchmark 3-month dollar Libor hits record low post-FOMC

* US commercial paper market shrinks 1st time in 3 months

* BoE, ECB hold rates, tweak support measures (Updates market action, changes dateline, previous LONDON)

By Richard Leong

NEW YORK, Nov 5 (Reuters) - Short-term U.S. interest rates futures rose on Thursday, a day after the Federal Reserve assured traders that it was sticking to its near zero rate policy to foster economic growth.

Nearby futures on Eurodollar <0#ED:> and federal funds <0#FF:> advanced to contract highs, implying traders were reducing bets the Federal Open Market Committee will raise interest rates in the first half of 2010. And once it does make such a move, the U.S. central bank's policy-setting group will do so slowly, analysts said.

"Yesterday's FOMC statement corroborated our expectations for rate policy - that the slack in the economy and lack of inflation pressures/expectations - would keep the Fed on hold for longer than expected," said T.J. Marta, chief market strategist with Marta on the Markets LLC in Scotch Plains, New Jersey.

Across the Atlantic, short-term sterling futures FSSM0 FSSZ0 and Euribor futures <0#FEI:> were mixed. They rebounded from session lows on initial negative reaction to policy views from the Bank of England and the European Central Bank, though the two central banks pledged to keep rates low.

In the bank-to-bank loan market, the London interbank offered rate on three-month dollars USD3MFSR= slipped to a new low for a fourth straight session at 0.27531 percent.

The equivalent rate on three-month sterling GBP3MFSR= rose to 0.60250 percent, while the rate on three-month euros EUR3MFSR= edged higher to 0.67500 percent. [ID:nL5414831]

RISK PREMIUMS STEADY

Short-term rate spreads were steady, reflecting confidence among traders the Fed will stay put into 2010, analysts said.

The spread on the three-month dollar Libor over Overnight Indexed Swap rate was unchanged at 13 basis points, while the spread on three-month dollar Libor over three-month Treasury bills held at 23 basis points.

Longer-dated risk premiums also fell with easing concerns about rising rates. The yield spread on two-year interest swaps over Treasuries contracted to 34.75 basis points from 36.25 basis points late on Wednesday.

The post-FOMC rally in rates markets was mitigated by Fed data showing a hefty contraction in the U.S. commercial paper market, which many companies rely on for short-term cash.

The CP market shrank for the first time in the last three months. The amount of these short-term corporate IOU's fell by $61.7 billion in the week ended Nov. 4, the biggest weekly decline since May. For more, see [ID;nN05116991]

BOE, ECB TWEAK SUPPORT

Less than 24 hours after the FOMC statement, the Bank of England said it would expand its quantitative easing program by 25 billion pounds to 200 billion pounds to help bring Britain out of recession. See [ID:nL5152809]

Meanwhile, the ECB hinted it would begin wrapping up some of its liquidity measures created during the height of last year's global financial crunch.

ECB President Jean-Claude Trichet said the bank's extra liquidity measures would be phased out in a timely manner. He also suggested the ECB's extraordinary 12-month money market operations would not be extended beyond the already announced December tender. For more, see [ID:nL5503413].

These signals disappointed those traders who had bet on a bigger purchase expansion from the BoE and unwavering cash support from the ECB.

Analysts said the market's initial reaction was overdone.

"There will still be enough that rates will still be very low at that time...gradually phasing out these measures also does not mean that they will be actively be absorbing liquidity," said Christoph Rieger, Commerzbank rate strategist in Frankfurt. (Additional reporting by Kirsten Donovan in London; Editing by Andrew Hay)